Mortgage Insurance Australia — What You Need to Know

Mortgage Insurance Australia — What You Need to Know

Owning a home in Australia comes with several types of insurance to consider — some required by lenders, some strongly advisable, and some optional. Understanding the difference can help you make informed decisions about protecting your biggest asset and the loan secured against it.

Types of Insurance for Home Loan Borrowers

Required vs Optional Insurance

Lenders Mortgage Insurance (LMI) — Required at >80% LVR

LMI is a one-off premium paid by the borrower when the deposit is less than 20% (LVR above 80%). It protects the lender — not you — if you default and the property sale doesn’t cover the outstanding debt.

→ Full guide: LMI Explained

Building Insurance — Required by Lenders

All major Australian lenders require building insurance to be in place as a condition of the mortgage. This protects the security property (the building structure) against fire, storm damage, flooding and other events.

→ Full guide: Building Insurance for Home Loans

Optional but Important Insurance

Mortgage Protection Insurance

A product that pays your mortgage repayments for a period if you become unable to work due to illness, injury, or involuntary redundancy. It is sometimes confused with LMI or life insurance — but is distinct from both.

→ Full guide: Mortgage Protection Insurance Explained

Life Insurance

If you die, your mortgage still needs to be repaid. Without adequate life insurance, your family may need to sell the property to cover the debt. Life insurance is not required by lenders but is widely considered essential for borrowers with dependants.

→ Full guide: Life Insurance for Mortgage Holders

Income Protection Insurance

If you cannot work due to illness or injury, income protection insurance replaces a portion of your income (typically 75%). This is the broadest protection for your mortgage — because it replaces income, not just one expense.

→ Full guide: Income Protection Insurance and Your Mortgage

How Much Building Insurance Do I Need?

Building insurance should cover the rebuild cost of the property — not its market value. These can differ significantly, particularly in expensive locations where land value is high but construction costs are lower. Underinsurance is a significant risk for Australian homeowners.

→ Full guide: How Much Building Insurance Do I Need?

What Happens to Your Mortgage If You Die?

This is one of the most important estate planning questions for property owners. The answer depends on your loan structure, whether you have a co-borrower, and whether life insurance is in place.

→ Full guide: What Happens to Your Mortgage If You Die?

Related Mortgage Guides

• LMI Explained — Lenders Mortgage Insurance
• All Costs and Fees When Buying a Home
• First Home Buyer Guide Australia
• Mortgage Calculators

What Insurance Does a Lender Require?

Most Australian lenders have two mandatory insurance requirements:

1. Building insurance: Must be in place before settlement. Covers the structure (not contents) against fire, storm, flood, and other specified events. The lender is noted on the policy as a mortgagee. If you fail to maintain building insurance, the lender can require you to rectify this and may arrange and charge for insurance themselves.

2. Lenders Mortgage Insurance (LMI): Required when your deposit is less than 20% of the property value (LVR above 80%). LMI is a one-off premium paid by you but protects the lender. It does not protect you if you default — your property can still be sold and you remain liable for any shortfall.

Building Insurance — How Much Cover Do You Need?

Building insurance should be set to the full replacement cost of the structure — the cost to rebuild it from the ground up if it were completely destroyed. This is not the same as:

• The market value of the property (which includes land value)
• The purchase price (which may include a premium for location or market conditions)

Rebuild cost calculators (available from the Insurance Council of Australia) can help estimate the appropriate sum insured. Underinsurance is common and can result in a partial payout if you claim — some policies include a co-insurance clause that penalises underinsured claims.

For strata properties, the owners corporation insures the building structure. Individual lot owners need contents insurance and may need strata title insurance for improvements within their lot.

Income Protection — The Most Important Insurance for Borrowers

Income protection insurance is not required by lenders but is arguably the most important cover for most Australian borrowers. Building insurance replaces the property. LMI protects the lender. But if you become unable to work due to illness or injury:

• Your income stops
• Your mortgage repayments continue
• You may be forced to sell your home

Income protection replaces up to 75% of your pre-disability income for the benefit period (typically 2 years, 5 years, or to age 65). Premiums are generally tax deductible when held outside super.

Policies vary significantly in:

• Waiting period: 30, 60, or 90 days before benefits commence
• Benefit period: How long payments continue (2 years vs to age 65)
• Definition of disability: “Own occupation” (can’t do your specific job) vs “any occupation” (can’t do any job)

Own occupation, to-age-65 policies are the most comprehensive — and the most expensive.

Life Insurance — Protecting Your Family’s Mortgage

If you die, your mortgage remains as a debt against your estate (or your joint borrower). Without adequate life insurance, your family may need to sell the home to repay the loan. Life insurance provides a lump sum that can cover:

• The remaining mortgage balance
• Dependants’ ongoing living expenses
• Education costs for children

A rough starting point is insuring for 10 times your annual income plus outstanding debt — though the right amount depends on your family structure, existing assets, and how long dependants would need support.

Life insurance premiums held outside super are generally not tax deductible for individuals (though premiums inside super are). Life insurance can be held inside super as a cost-effective way to fund premiums, though this reduces the super balance available for retirement.

Frequently Asked Questions

Is building insurance the same as home and contents insurance?

No — building insurance covers the structure (walls, roof, floors, fixed fixtures). Contents insurance covers your personal belongings inside the property. Most insurers offer a combined home and contents policy, but the building and contents portions are separately insured and priced. Only the building component is required by lenders.

What is the difference between LMI and mortgage protection insurance?

LMI (Lenders Mortgage Insurance) protects the lender if you default — you pay the premium but receive no benefit. Mortgage protection insurance (MPI) protects you by covering mortgage repayments if you cannot work. They are entirely different products. LMI is a once-off cost at loan origination; MPI is an ongoing monthly premium.

Can I include insurance premiums in my mortgage?

LMI can be capitalised — added to your loan balance rather than paid upfront. This is common but means you pay interest on the LMI amount over the life of the loan, increasing its effective cost. Building and other insurance premiums are not typically included in the loan — they are paid directly to the insurer annually or monthly.

This section provides general information about insurance types relevant to Australian home loan borrowers. Insurance products vary significantly — read product disclosure statements (PDS) before purchasing. For advice tailored to your situation, speak with a licensed financial adviser. Find one through MoneySmart.